Fdi And Economic Development: The Role Of Financial Markets

FDI (foreign direct investment) is playing a more and more important role in Chinese domestic capital inflow during the recent 10 years. The cause of such tide is partly because the favorable policies towards FDI the Chinese government provides. Why the government doing this is because China is lack of capital and people believe FDI can bring lots of spillover effects. Actually it is still in doubt whether FDI can benefit the home-country and what kind factors it needs to bring it into play contribution. In our research, we first reviewed the foreign researches on FDI spillover effects and listed the factors that can infect FDI spillover effects that people have already known. Then we point out a factor that researchers neglected—financial market.We put the financial market factor into analysis to test whether and how much it can influence the exertion of FDI spillover. We examine whether better-developed financial markets can benefit more from FDI to promote economic growth. To do this, we use a battery of financial market variables that exist in the literature and employ them in growth regressions to study the impact of the interaction of these variables with FDI on economic growth. We find that, although FDI alone plays an ambiguous role in contributing to economic growth, having well developed financial markets alters the results significantly.The results we get in this paper reminds us that we should pay attention to the economic environment construction besides providing favorable policies, especially the financial market development. In the mean time, this paper also provides a totally new view point to stress the importance of giving more credits to private sector. Because the private sector is the main absorber of the FDI spillover, we should give more credits to the private sector. The paper suggests developing a financial market aiming at private sector.